The money makers

By JIM EAGLES, Business Herald editor


Rod Duke's Briscoe Group was New Zealand's most efficient wealth creator last year - in only 12 months almost trebling the capital invested in it - according to the latest Wealth Creators Report from international consultants Stern Stewart.

Contact Energy created the most wealth, generating an extra $647 million in value for its shareholders during the year, but it is a vastly bigger company.

In the period under study, the 12 months to June 30, 2002, Briscoe Group's gain of $154 million - in what Stern Stewart calls Market Value Added (MVA) - represented an amazing 193 per cent of its average capital.

Contact's wealth creation, although very impressive, equated to a more modest 37 per cent of its capital.

Briscoe Group's achievement was all the more notable because it was based on solid profits as well as big gains in its share price.

The retail chain's profit after meeting its cost of capital - what Stern Stewart calls Economic Value Added (EVA) - was $10 million. That equates to 9.3 per cent of its average capital, a rate exceeded by only three other companies.

The contrast could not be more stark with Sky Network TV, in second place on the list of most effective wealth generators.

Sky TV has certainly done very well for its investors - the latest MVA shows that in its lifetime the company has effectively quadrupled the capital invested in it - but it continues to record losses.

Its growth is based not on profits but on investors' belief that Sky, like Rupert Murdoch's successful British equivalent BSkyB, will cash in one day.

Its EVA is one of the worst in the list, but its Future Growth Value (FGV) - Stern Stewart's term for value based on market expectations of future profits - is one of the highest.

As it happens, Sky TV's pattern of wealth creation based on hopes of better things in the future was more common last year than Briscoe Group's wealth based at least in part on real profits.

Stern Stewart's study takes in New Zealand's 30 largest listed companies and shows that between them they created $1.8 billion in extra wealth.

During what was a relatively good year for the sharemarket, the combined FGV of the companies analysed rose by $2.2 billion.

But, at the same time, they still fell $1.7 billion short of covering their cost of capital.

As in previous years, that was largely due to dismal performances by a handful of large companies - in particular, Carter Holt Harvey, Air New Zealand, Fletcher Challenge Forests, Independent Newspapers and Sky TV - whose EVA losses outweighed the solid profits achieved by most of the smaller companies.

Ironically, many of those same companies were among the biggest wealth creators last year thanks to investors obviously believing the worst to be over.

Even Contact only just managed to cover its cost of capital. According to Stern Stewart's calculations, the company's EVA for last year was just 0.1 per cent of its average capital (which rather gives the lie to claims of profiteering by power companies).

But at the same time its FGV jumped by $672 million, signalling investor confidence in Contact's management and strategy.

An even more extreme example was Carter Holt Harvey, which has destroyed $1.7 billion in shareholder wealth over its lifetime, but last year created $539 million.

Stern Stewart's figures indicate that the gap between the company's cost of capital (13 per cent) and its return on capital (minus 2 per cent) was actually worse than ever.

Again, its wealth creation was a matter of investors deciding that the refocusing carried out under former CEO Chris Liddell has left the company well placed for growth when world pulp and paper prices finally improve and, as a result, boosting the share price.

Air New Zealand's place among the top wealth creators is the most artificial of all.

It also has an MVA of minus $1.7 billion, and last year its return on capital was zero.

But investors have obviously been keen to have a punt on the small number of tradeable shares and a recovering share price has resulted in a theoretical gain - mostly to the Government - of $357 million.

However, there have been other companies besides Briscoe Group to generate real profits during the year.

As ever, one shining example was The Warehouse, which not only created a further $529 million in wealth - taking its MVA to $1.9 billion - but also earned a healthy 6 per cent more than its cost of capital, giving an equally healthy EVA of $49 million for the 12 months.

Another star performer was F&P Healthcare, which achieved the best EVA of all in proportion to its capital base, in spite of being handicapped by the fact that Stern Stewart's average capital calculation includes a period before the F&P split.

The port companies also did extremely well, with Lyttelton Port, Port of Tauranga and Ports of Auckland coming second, third and fifth on the table of EVA in proportion to capital.

The biggest EVA for the 12 months was earned by the country's largest company, Telecom, which turned in a real profit of $224 million, on top of $521 million the year before. That did not stop Telecom also turning in the biggest drop in MVA during the same period, the global swing against telcos costing it $1.3 billion.